Deductibility of Club Dues
Arthur Drache, June 16, 2008
One of the most attractive perks of senior employees is receiving membership in a club the fees of which may often be beyond his or her ability to fund.
There are two tax issues which are in play. The first is whether the employer can deduct the dues paid, even assuming that it is conceded that the purpose of the membership is to facilitate business. The problem is that the Income Tax Act has some stringent limitation in place.
Subparagraph 18(1)(l)(ii) prohibits the deduction of any expense incurred by the taxpayer (read in this instance, the employer) in respect of membership dues (whether initiation fees or otherwise) which entitle the taxpayer, the taxpayer’s employees or anyone else to use the facilities of any club, the main purpose of which is to provide dining, recreational or sporting facilities for its members. Given that most clubs fall into this category if they are to be of any “business use’, it is hard for the employer to get a deduction.
CRA stated in a recent letter that “when determining the main purpose for which a club was organized, the instruments creating the club, such as the content of the club’s by-laws to regulate its affairs, are to be considered. Also of importance in this determination is whether more than 50 percent of the club’s assets are used in providing dining, recreational or sporting facilities.”
As is so often the case, the CRA says the issue is a “matter of fact” whether the prohibition will apply. It is likely that golf or curling clubs memberships will be non-deductible but the costs of joining, for example, fraternal groups may meet the test in many situations.
It is worth noting that a “facility” will not include the dining room, banquet halls, conference rooms, beverage rooms or lounges of a golf club and, thus, the deduction of the cost of meals and beverages incurred at a golf club will not be denied under the provisions of subparagraph 18(1)(l)(i).
However, the issue of deductibility does not have an impact on the second key tax question, namely whether the employee who uses the membership receives a taxable benefit. The basic rule of thumb is that if it can be established that the main purpose of the membership is to further the business of the employer, there is no taxable benefit to the employee, even if he or she gets a great deal of personal pleasure out of the membership. In most cases, it is not that difficult to establish the “business purpose” behind the membership.
We would also point out that these rules apply equally to private companies. Thus, a company which is owner-operated will have the same rules apply. So if it can be established that the key purpose of the membership is to generate and retain business, the fact that the sole shareholder is also the usuer of the membership does not change the rules.
As the CRA says almost ad nauseum the tax implications are all based on the specific facts of the situation. Getting a deduction for dues in the face of the statutory limitation can be extremely difficult but the hurdle to avoid a taxable benefit of employment is not nearly so high.